European Central Bank left rates at 2% amid stable inflation and rising concerns over France's fiscal crisis Image credit: Business Standard
(The Post News) – The European Central Bank (ECB) left interest rates unchanged on Thursday, showing confidence that inflation is under control and the eurozone economy is stronger than expected, even after facing pressure from U.S. President Donald Trump with tariffs.
In Frankfurt, the ECB Governing Council kept the 2% benchmark deposit rate steady. ECB President Christine Lagarde described policy as “in a good place,” and emphasized decisions would stay on a “meeting by meeting” basis with no predetermined course.
The action contrasts with the U.S. Federal Reserve, which is considering reducing rates at its September 17 meeting.
Eurozone Economy
The 20 countries that use the euro currency saw 0.1% growth in the second quarter, avoiding recession in the face of fresh tariffs. The S&P Global purchasing managers’ index was 51 in August, a figure that signals expansion.
The European Commission, for its part, agreed with Washington to cap tariffs on European goods at 15%. While higher than pre-Trump levels, the cap relieved concern of a bigger assessment.
“Trade uncertainty has clearly diminished,” Lagarde stated.
The euro-area consumer prices rose 2.1% last month, a mere tick from the ECB’s 2% level. With inflation stable, policymakers weren’t under much stress to act. Economists expect a deeper cut could occur later this year if growth slows.
The ECB had aggressively tightened rates between 2021 and 2023 to fight rising inflation but has since retreated to support growth.
Attention now turns to France, where a large budget deficit and political procrastination have shaken bond markets. France had a deficit of 5.8% of GDP last year, and this caused investor concerns about the cost of it borrowing.
Asked about intervention through the ECB’s crisis bond-buying program, Lagarde said it was something that was not on the agenda.
“I’m not talking about any individual country, but to indicate that we always have a close eye on market trends and euro area sovereign bonds are on order and operating well,” she said.
Regulations at the ECB only allow intervention if countries are honoring EU budgetary thresholds or taking credible steps towards doing so, a threshold that France is not meeting at present.
ECB Lagarde’s Balancing Act
Experts warn that Lagarde must tread carefully: signalling the ECB would not rescue governments resistant to reform, but not provoking a panic that destabilises the markets.
“The ECB is reaching the end of policy measures and is likely to leave rates at current levels for some time,” Pimco portfolio manager Konstantin Veit said.
Lagarde finished on a good note: “We are in good shape. The inflation is in the right place, and the domestic economy is solid.”
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